Monetary policy loosening has desired effect

MNB

Bond yields fell and the Hungarian forint returned to a weaker level after the National Bank of Hungary (MNB) loosened its monetary policy last week, notes an analysis on economic news portal vg.hu, adding that interbank rates can be expected to drop even lower in the coming period.

The MNB has achieved its short-term goal through its loosening of monetary policy last week, successfully pushing the forint back to a weaker level and reining in yields on both short and long-term government bonds, writes vg.hu.

"Since the crisis, the evaluation of domestic government bonds has never been as strong as it is following the MNBʼs latest loosening measures," economists of Raiffeisen Bank were cited as saying in a fresh assessment of the situation. "In the 10-year segment, the premium over German bonds is now scarcely more than 2%, unprecedented since 2007."

During earlier loosening, the charge was often leveled at the MNB that such measures only impacted short-term yields, while having little effect on long-term ones, which thus followed a steep yield curve. Now, however, it seems that the central bank has endeavored to change this. Vg.hu cites CIB Bank as emphasizing that the MNBʼs express goal is to squeeze short-term market interest rates and yields down still further, and to achieve the greatest possible reduction in yields at the more distant end of the yield curve by wielding liquidity-expanding tools.

The central bank loosened its monetary policy by a greater than expected degree last Tuesday, limiting 3-month deposits to only HUF 75 billion by the end of the year. It reduced interest on one-day deposits and announced it would continue foreign currency swap tenders, while considering other tools to apply in the event of failure to bring down longer-term yields using current means.

"All this is therefore a fairly strong package of measures and simultaneous guidance, which has triggered a further plunge in both Bubor interest rates and yields since the decision," noted Raiffeisen.

The forint also reacted to the decision, as the exchange rate against the euro slipped back to around HUF 310 following a recent strengthening, where it appears to be stabilizing for the moment, commented vg.hu.

Raiffeisen observes that if the central bankʼs communication remains effective, then the domestic bond market may remain attractive even in the long term, while CIB expects yields to continue to fall over the next few weeks.

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